China’s March Trade Deficit — What Does It Mean?

Today I was on Al-Jazeera, responding to questions about China’s latest announcement that it ran a $7.2 billion trade deficitfor the month of March — its first in six years. This is essentially what I had to say:

Today’s news must strike people as surprising, given all they’ve heard about China running chronic trade surpluses. But you need to put it in context. China’s exports every year are highly seasonal — they peak in the fall, when Christmas orders are being shipped, and drop in the spring. So China’s trade surplus usually declines in the spring, and it’s not unprecedented for it to run a one-month deficit even in a year when it ends up running a sizeable trade surplus. The last deficit took place in April 2004, a year in which China went on to rack up a then-record $32 billion surplus.

What tipped this month’s figure from a marginal surplus to a deficit was a surge in imports, up 66% from last year. But it going to be important to drill down and take a closer look at exactly what’s making up those imports. If they are finished consumer goods, then it could be a sign of rising consumption in China and a shift towards more balanced trade. But if they consist mainly of raw materials, as many economists suspect, it could indicate that Chinese manufacturers are gearing up for a surge in exports later this year (a phenomenon compounded by rising commodity prices for inputs like iron ore and crude oil, in part due to rising Chinese demand).

The key question is, is this a trend or a cycle? Is it a trend towards higher domestic consumption and more balanced trade, or part of a production cycle that leads right back to where we started? I’m not convinced yet this is a trend.

There’s a lot of speculation that China may use news of this month’s trade deficit to fend off US pressure to strengthen the RMB, arguing that it is making progress in restructuring its economy and boosting domestic demand. But if this is part of a cycle, as many suspect, and China goes right back to running trade surpluses in a month or so, that argument’s not going to have much staying power. That’s probably why even Chen Deming, China’s Minister of Commerce (who has been very vocal these past few weeks about the damage a stronger RMB could do to exporters) is being careful not to overplay the news, describing the March trade deficit as “a blip on the radar screen” that may soon be reversed.

The key thing to watch, regarding China’s willingness to strengthen the RMB, is the recovery of China’s exports. They’re up just over 20% from last year, but that’s just barely back to the level they were at before the global financial crisis struck. With Chinese exporters already struggling, China’s leaders have been reluctant to hit them with a “double whammy” in the form of a less competitive currency. If exports continue their recovery, though, that will give the Chinese a lot more comfort in moving towards a more flexible exchange rate.

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The key question is, is this a trend or a cycle? Is it a trend towards higher domestic consumption and more balanced trade, or part of a production cycle that leads right back to where we started? I’m not convinced yet this is a trend.

have you totally forgotten the biggest component of chinese gdp: fixed capital investments?

At this point, I haven’t heard any indication that the surge in imports consists of machinery or other capital goods from abroad. More signs point to raw materials. But you’re correct, it’s a possibility worth looking into. A surge in machinery imports would also suggest gearing up for expanded production. Like raw materials, this would not necessarily go towards the production of exports, but it’s hard to believe exports wouldn’t be part of the story.

no, i meant mainly buildings and infrastructure investment. companies are building real estate as well so they reach their target for GDP growth. and the difference between raw materials imports and book value of appartments that stay unsold and unoccupied is booked as GDP contributor.

could it be related to currency speculation ahead of the expected cny revaluation? i.e. getting around the currency restrictions by borrowing dollars, buying commodities, “importing” them, then selling them for cny?

“If they are finished consumer goods, then it could be a sign of rising consumption in China and a shift towards more balanced trade. But if they consist mainly of raw materials, as many economists suspect, it could indicate that Chinese manufacturers are gearing up for a surge in exports later this year”

This is a big misunderstanding of Chinese economy and a very simplistic interpretation of the March trade deficit.

Put simply, there is seasonal factor, there is timing factor and there is the factor of rising commodity price that contribute to the March deficit. But the most important reason for the March deficit is the red-hot domestic demand and the slow recovery of global economy. The deficit continues the trend of declining surplus since late last year – Q1’s trade surplus has declined 80% yoy.

Chinese imports mainly consist of raw materials and commodities, hi-tech equipment and machinery, and some parts and components for export. China is the world’s largest consumer goods exporters; it does not import a lot of consumer goods.

A lot of people make the naive mistake of thinking Chinese economy lives or dies by export, that if the US consumer stops buying Chinese goods, the Chinese economy simply collapses. Granted, export is very important for China, but China is a continent-size economy and its economy is mainly driven by its domestic demand, i.e., domestic investment and consumption.

Therefore to interpret that a large increase in Chinese import indicate that Chinese manufacturers are gearing up for a surge in exports later this year is simply misleading. In fact, it’s the clearest sign of surging domestic demand. Do we really believe that China consumes over 500 million tons of steel for export purpose? How can we convince ourselves that China consumes 40% of world’s cement just to build capacity for export? China is in the stage of capital-intensive industrialization and urbanization while its exports are mainly labor-intensive consumer goods (at least those to the developed economies).

By the way, you will be forgiven if you believe that China has cooked the number, again, when reading the news below:

it looks like about 25% of the imports were a few key raw materials – US$14 billion alone of the US$119 billion seem to have been crude oil and oil products and given the increase in Crude oil over the last month. But I’d agree that there seems to have been some timing at play. The real question is how much of the surge in imports is components for re-export. My sense is that’s still a fair amount but we’ll see in a few months. Either way it adds some grist to the debate.

The last time this happened was 6 yrs ago. None of the major economists expected this. Now we a getting highly contrived speculations that seek to fit this anomaly on the curve.

Simple explanation that treats the surplus as an unexpected event; The surplus is proof that China’s production is totally out of whack with demand. They are buying as much raw material as possibble and producting at a record clip but their forfeign customers are simply not buying.

Proponents of the “China Story” always downplay the fact that China is a poor, very poor country on a per capita basis. To expect this country to carry the global economy on its shoulders is another market scam.